Landowners need to seek legal counsel before signing leases

Kate Hessling, Tribune Staff Writer

Published 2:59 pm, Friday, April 22, 2016

BAD AXE — “Be sure to understand the contract terms before you sign. Negotiate a win-win agreement. Limit what you’re giving away. Beware of those that would take advantage of you — ask for information about their firm. Seek good qualified advice before you sign.”

These were the key points experts at Wednesday’s oil and gas leasing workshop gave the more than 200 landowners in attendance, some of which already have been approached by agents interested in getting them to sign an oil and gas lease.

One gentleman in attendance said he’s received offers for $50 and $75 per acre. It was clear others too have been courted by oil and gas leasing agents.

But it’s not just Huron County that’s seeing a huge increase in oil and gas leasing activity — it’s the entire state, said Farm Management Agent Dennis Stein, of the Michigan State University Extension Office in Caro.

Stein explained the State of Michigan held an auction in the spring that resulted in $178 million, which is significantly higher than previous years.

He explained the state has been leasing state-owned acreage for the past 81 years, and in that time, a total of $190 million in bonus revenue has been generated. The fact that the state’s recent auction generated so much revenue in bonus payments — which ranged between $15 and $5,500 per acre —shows the focus of oil and gas in Michigan has made a major change, Stein said.

And other states, such as New York and Pennsylvania are seeing similar leasing/drilling activity, he said.

The reason for the “boom” is new technology that allows for drilling in deeper rock, resulting in the ability to extract natural gas in areas where it once never was possible.

The technology is called horizontal hydraulic fracturing, and it’s what’s been used in what’s been dubbed the “Pioneer Well” in Missaukee County, where capacity increased to five times more than any other well in the area, Stein said.

Along with a horizontal well, there are roads, pipelines, a flare stack, storage facilities and other infrastructure that are needed for this kind of drilling project. And that’s something experts on Wednesday said landowners absolutely have to be aware of when considering to sign a lease.

Stein said by signing a lease, the landowner is giving a developer the right to develop the land — which includes erecting mud pits, flare stacks, storage buildings and building roads. It needs to be stipulated in the lease that those items are built (and removed) at the developer’s cost, or else instead of getting a payment for a lease, the landowner could get a bill.

“It’s extremely important you understand the contract you sign,” he said, adding if someone doesn’t understand everything included in a contract then “don’t sign it.”

“You have to be a negotiator — a price maker, not a price taker,” he said.

Talley stressed landowners have to realize a leasing agent — or “land man” — is someone who is paid by, and whose loyalty lies with, the oil and gas company.

“Their job is to talk you into signing a lease,” he said.

Landowners need to understand that the royalty terms and language in a lease are more important than a bonus payment, Talley said.

What may seem like a large bonus payment, may actually not be what’s best for the property owner, as once a well is put into true production, it will require pipelines across properties and other infrastructure, Stein said.

“It’s not just a drilling process and money up front, it can be long-term impacts of a whole host of things,” he said.

And the whole host of things can mean more money for property owners, Talley said. He noted landowners should seek compensation for things like right of ways, otherwise, they’re just “leaving money on the table.”

“Just about everything in a lease can be negotiated — but you have to be determined and firm,” he said, noting good leases can take a long time, and it’s OK to not immediately accept an offer.

While good leases take a long time to negotiate, they also last a long time, Talley said. Unfortunately, a bad lease also can last a long time.

“Once the lease is signed and there’s production, you’re stuck with it through the life of the well,” he said.

Therefore, landowners shouldn’t be afraid to say no the first time they are approached — nor should they be afraid to say no again, as it’s all part of the negotiation process, Talley said.

There are a variety of agreements landowners can make, said Trent C. Hilding, an Edmore attorney who specializes in agricultural law and has reviewed several thousand acres of mineral, oil, gas and wind leases.

The first type of agreement is a lease which requires the land revert back to the landowner from the lessor after a certain period of time, Hilding said. The second type of agreement is an easement, in which the landowner grants use of his or her land to another for a specific purpose. Unless a specific time limit is stated in the agreement, easements are perpetual in nature — which is why many companies prefer to sign easements rather than leases with landowners.

The third type of agreement is a deed, which transfers title to an interest in real property, he said.

When forming an agreement, landowners have to have everything in writing — no matter what sort of verbal agreement is given from an agent to a landowner, Hilding said. The agreements should specifically identify rights and restrictions regarding crop, livestock, infrastructure or other damages. Also, the lease should include a rights of refusal on other renewable energy sources and increased payments for infrastructure, he said.

Talley said it’s also important for landowners to have a surface use and surface damage agreement in place — i.e. negotiated, written and then signed by both the developer and landowner —before a lease is signed.

That should address things like having the height and location of surface facilities allow for the operation of center pivot sprinklers, and that the developer remove material from sludge pits and dispose them off site, he said. Also, the developer should control noxious weeds, pay for damages to a farm tenant’s crops, segregate topsoil from subsoil and document baseline water quality.

A good idea is for the landowner to document their well’s water quality before any activity starts so they have a benchmark to refer to in the future, Talley added.

Landowners also need to consider PA 116 issues, as there’s a chance they could lose some credit if too much of their land is taken out of agricultural production and used for non-agricultural purposes, Hilding said. He noted anyone with land in PA 116 who signs a lease — whether it be for wind or oil and gas drilling — should get approval from their local township.

Wednesday’s meeting featured a slew of other suggestions and considerations landowners need to be aware of before signing a lease. But the one that was most stressed is that before anyone signs anything, they take time to read it and make sure they fully understand every provision included therein. And, once they do — or even before they do — they absolutely have to have it reviewed by an attorney specializing in these contracts.

The presentations in Wednesday’s oil and gas lease seminar, which was sponsored by Kurt Damrow, the Republican candidate for 84th District State Representative, have been given in other areas of the state in an effort to educate landowners to make informed decisions and protect landowner rights in the oil and gas leasing process.

The next oil and gas lease seminar MSU Extension will present is set for 6 p.m. Wednesday at the Standish-Sterling High School auditorium, located at 2401 Grove Road in Standish.

All of the information presented Wednesday, along with a wealth of other resources for landowners, is available on the website MSU Extension created for landowners, www.msue.msu.edu/oilandgas.